M/s. Cera Sanitaryware Ltd., Ahmedabad V. The Addl.CIT, Range-1, Ahmedabad

ITA 350/AHD/2016

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 6039 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-02-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2011-2012
• Appeal Filed On: 11-02-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K DEV
• Assessee Lawyers: T H VASA
• Keywords: Business income; Business expenditure; Earning of tax free income; Proportionate interest; Initiation of penalty proceedings
• Section: 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, AHMEDABAD , , BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER & SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER ./ I.T.A. NO.350/AHD/2016 ( / ASSESSMENT YEAR : 2011-12) M/S.CERA SANITARYWARE LTD. MADHUSUDAN HOUSE OPP. NAVRANGPURA TEL.EXCHANGE, NAVRANGPURA AHMEDABAD 380009 / VS. ADDL.CIT RANGE-1 AHMEDABAD-380 015 # ./ ./ PAN/GIR NO. : AABCM 9244 N ( #% / APPELLANT ) .. ( &#% / RESPONDENT ) #%' / APPELLANT BY : SHRI T.H. VASA, AR &#%(' / RESPONDENT BY : SHRI S.K. DEV, SR.DR )*(+ / DATE OF HEARING 11/01/2018 ,-./(+ / DATE OF PRONOUNCEMENT 15/02/2018 / O R D E R PER PRADIP KUMAR KEDIA - AM: THE CAPTIONED APPEAL HAS BEEN FILED AT THE INSTA NCE OF THE ASSESSEE AGAINST THE APPELLATE ORDER OF THE COMMISSIONER OF INCOME TAX(APPEALS)-6, AHMEDABAD [CIT(A) IN SHORT] DATED 30/10/2015 ARISING IN THE ASSESSMENT ORDER PASSED UNDER S.143(3) OF T HE INCOME TAX ITA NO.350/AHD/ 2016 M/S. CERA SANITARYWARE LTD. VS. ADDL.CIT ASST.YEAR 2011-12 - 2 - ACT, 1961 (HEREINAFTER REFERRED TO AS 'THE ACT') D ATED 31/01/2014 RELEVANT TO ASSESSMENT YEAR (AY) 2011-12. 2. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE R EAD AS UNDER:- 1. THE LD. CIT (APPEALS)-6, AHMEDABAD HAS ER RED IN CONFIRMING ADDITION OF RS.9,17,381/- APPLYING PROVISIONS OF SECTION 14A R.W. RULE 8D OF I T RULES, 1962. THE ADDITION MADE BY LD. A.O. AND CONFIRMED BY LD. CIT (APPEALS)-6 AHMEDABAD IS AGAINST PRINCIPLE OF LAW, FACTS AND EVIDENCE ON RECORD. 2. THE LD. A.O. AND LD. CIT (APPEALS)-6 HAVE ERRED IN CONSIDERING THAT PROVISIONS OF SECTION 14A WERE APPLICABLE AS EXEMPT ED INCOME WAS EARNED AND DISALLOWANCE HAD TO BE COMPUTED BY APPLYING RULE 8D , IGNORING SUBMISSIONS, OF THE APPELLANT THAT (I) THERE WAS NO EXPENDITURE INC URRED TO EARN EXEMPTED INCOME AND (II) COMPANY HAD SUFFICIENT INTEREST FREE FUNDS TO INVEST INTO EXEMPTED INVESTMENTS, THE DISALLOWANCE WAS NOT JUSTIFIED AND WAS AGAINST THE PROVISIONS OF LAW. 3. THE LD. A.O. AND LD. CIT (APPEALS)-6 HAVE FURTHER ERRED IN LAW AND ON FACTS THAT INTEREST BEARING BORROWING WERE MADE FOR SPECIFIC BUSINESS OBJECTIVE/PURPOSE AND THEREFORE, THEY CANNOT BE CON SIDERED AS INDIRECT EXPENDITURE TO EARN EXEMPTED INCOME AND INTEREST-FR EE FUNDS ARE FIRST APPLIED TO INVESTMENT EARNING EXEMPTED INCOME. 4. THE LD. A.O. AND LD. CIT (APPEALS)-6 - BO TH HAVE ERRED IN LAW AND ON FACTS THAT DISALLOWANCE OF RS.9,17,381/- WAS CORREC TLY COMPUTED AS PER RULE 8D, IGNORING APPELLANT'S SPECIFIC REQUESTS THAT: (A) INTEREST EXPENDITURE ON SPECIFIC BUSINESS BORRO WING/LOANS SHOULD BE EXCLUDED AND THEN INTEREST INCOME EARNED BY THE APPELLANT SH OULD BE DEDUCTED FROM THE BALANCE OF INTEREST EXPENDITURE. (B) WHILE TAKING VALUE OF AVERAGE INVESTMENTS EARNI NG EXEMPTED INCOME, INVESTMENT MADE IN NON- EXEMPTED INCOME INVESTMENTS SHOULD BE EXCLUDED. 5. THE LD. A.O. ERRED IN CONSIDERING THAT APP ELLANT HAD INCURRED ADMINISTRATIVE EXPENSES TO EARN EXEMPTED INCOME AND FURTHER ERRED IN ADDING RS. ITA NO.350/AHD/ 2016 M/S. CERA SANITARYWARE LTD. VS. ADDL.CIT ASST.YEAR 2011-12 - 3 - 1,94,310/- @ 5% OF THE INVESTMENTS OF RS.3,88,62, 056/- AS INCOME OF THE APPELLANT COMPANY. 6. THE APPELLANT CONTENDS THAT THERE WAS NO EXPENDITURE INCURRED TO EARN EXEMPT INCOME AND ALL THE EXPENDITURE INCURRED WAS BUSINESS EXPENDITURE ENTITLED TO DEDUCTION FROM BUSINESS INCOME. 7. THE LD. CIT (APPEALS)-6 OUGHT TO HAVE DIR ECTED TO CANCEL INITIATION OF PENALTY PROCEEDINGS FOR EXEMPTED INCOME. 8 IN VIEW OF THE ABOVE AND THAT MAY URGE AT THE TIME OF HEARING, IT IS PRAYED THAT- (I) THE ADDITION OF RS,9,17,381/- MAY PLEASE BE DELETED AND HOLD THAT PROVISIONS OF SECTION 14A AND / OR RULE 8D ARE NOT APPLICABLE AND THERE WAS NO EXPENDITURE INCURRED TO EARN EXEMPTED INCOME. (II) THE INTEREST CHARGED U/S.234B OF THE ACT OF RS.27,47,955/- AND U/S. 234C OF RS.28,03,065/- OF THE ACT MAY PLEASE BE DELETED AND /OR REDUCED. (III) THE PENALTY PROCEEDINGS INITIATED U/S.271( L)(C) OF THE ACT MAY PLEASE BE CANCELLED AND THE NOTICE IS VACATED. (IV) SUCH OTHER RELIEF OR REDUCTION AS THE FACTS AND CIRCUMSTANCES OF THE CASE SO REQUIRED, BE GRANTED. 3. THE GROUNDS RAISED BY THE ASSESSEE ARE SOMEWHAT ARGUMENTATIVE AND ARE OUT OF TUNE WITH RULE 8 OF THE INCOME TAX R ULES, 1962. HOWEVER, IN ESSENCE, THE ASSESSEE IS AGGRIEVED BY T HE ADDITION OF RS.9,17,381/- ON ACCOUNT OF DISALLOWANCE MADE UNDER S.14A OF THE INCOME TAX ACT, 1961 BY APPLYING RULE 8D OF THE I.T .RULES, 1962. ITA NO.350/AHD/ 2016 M/S. CERA SANITARYWARE LTD. VS. ADDL.CIT ASST.YEAR 2011-12 - 4 - 4. THE FACTS APROPOS TO THE ISSUE ARE THAT THE ASSE SSEE IS ENGAGED IN THE MANUFACTURE OF SANITARY-WARES AND TRADING IN CE RAMIC ITEMS ETC. THE RETURN OF THE ASSESSEE FOR AY 2011-12 WAS SUBJECTED TO SCRUTINY ASSESSMENT. IN THE COURSE OF SCRUTINY ASSESSMENT, THE ASSESSING OFFICER (AO) INTER-ALIA OBSERVED THAT THE ASSESSEE HAS EARNED DIVIDEND INC OME OF RS.9,99,043/- FROM MUTUAL FUND INVESTMENTS WHICH IS EXEMPT FROM TAX. THE AO ACCORDINGLY INVOKED PROVISIONS OF SECTION 14 A OF THE ACT AND COMPUTED DISALLOWANCE UNDER RULE 8D OF THE I.T. RUL ES 1962. CONSEQUENTLY, PROPORTIONATE INTEREST AMOUNTING TO R S.7,23,071/- DEEMED TO BE ATTRIBUTABLE AVERAGE VALUE OF INVESTMENTS HAD BY ASSESSEE WAS DISALLOWED UNDER RULE 8D(2)(II), AND RS.1,94,310/- BEING 0.5% OF THE AVERAGE VALUE OF INVESTMENT WAS ALSO DISALLOWED TOW ARDS ADMINISTRATIVE EXPENDITURE. THE TOTAL DISALLOWANCE OF THUS WORKED OUT TO RS.9,17,381/-. 5. THE CIT(A) CONFIRMED THE AFORESAID ACTION OF THE AO IN FIRST APPEAL. 6. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSESS EE IS IN APPEAL BEFORE THE TRIBUNAL. 7. THE LD.AR FOR THE ASSESSEE MR.T.H. VASA, AT THE OUTSET, ADVERTED OUR ATTENTION TO THE BALANCE-SHEET OF THE ASSESSEE- COMPANY AND SUBMITTED THAT THE OWN CAPITAL ALONG WITH FREE RESERVES (RS.1 11.55 CRORES) FAR EXCEEDS CORRESPONDING INVESTMENT IN MUTUAL FUNDS ET C.(RS.7.77 CRORES) ITA NO.350/AHD/ 2016 M/S. CERA SANITARYWARE LTD. VS. ADDL.CIT ASST.YEAR 2011-12 - 5 - AND THEREFORE DISALLOWANCE UNDER RULE 8D(2)(II) IS NOT PERMISSIBLE IN VIEW OF LONG LINE OF JUDICIAL PRECEDENTS INCLUDING THE DECISION OF HONBLE GUJARAT HIGH COURT IN PRCIT VS. SINTEX INDUSTRIES L TD. 248 TAXMAN 449 (GUJ.). 8. AS REGARDS, ESTIMATED DISALLOWANCE TOWARDS ADMIN ISTRATIVE AND MANAGERIAL EXPENSES UNDER RULE 8D(2)(III), THE LD.A R FOR THE ASSESSEE ADVERTED OUR ATTENTION TO VARIOUS SUBMISSIONS MADE BEFORE THE LOWER AUTHORITIES AS WELL AS THE BALANCE-SHEET FILED BEFO RE THE AUTHORITIES AND SUBMITTED THAT THE TAX-FREE DIVIDEND INCOME HAS BEE N DERIVED FROM INVESTMENTS IN MUTUAL FUNDS ONLY WHICH WERE IN THE NATURE OF ONE TIME INVESTMENTS WHICH DOES NOT INVOLVE INCURRING OF ANY ADMINISTRATIVE EXPENDITURE PER SE . THE LD.AR FURTHER SUBMITTED THAT MUTUAL FUNDS AR E DEDUCTING THEIR FUND MANAGEMENT CHARGES FROM THE SA ID MUTUAL FUND INVESTMENTS SO MADE WHICH ARE AKIN TO SUCH ADMINIST RATIVE EXPENSES. THUS, IN THE GIVEN FACTS, NO FURTHER DISALLOWANCE T OWARDS ADMINISTRATIVE EXPENSES IS CALLED FOR. 9. THE LD.DR, ON THE OTHER HAND, RELIED UPON THE OR DER OF THE CIT(A) AND AO. ITA NO.350/AHD/ 2016 M/S. CERA SANITARYWARE LTD. VS. ADDL.CIT ASST.YEAR 2011-12 - 6 - 10. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD AND HAVING ALSO GO NE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. THE SOLITARY ISSUE IN TH E PRESENT APPEAL IS DISALLOWANCE OF CERTAIN EXPENDITURE DEEMED TO BE AT TRIBUTABLE TO EXEMPT INCOME BY RESORTING TO SECTION 14A OF THE ACT. WE FIND THAT THE AVERMENT MADE ON BEHALF OF THE ASSESSEE THAT OWN CA PITAL TOGETHER WITH RESERVES HELD BY THE ASSESSEE ARE FAR IN EXCESS OF THE CORRESPONDING INVESTMENT IS SUPPORTED BY THE BALANCE-SHEET FILED BY THE ASSESSEE. THERE IS NO REBUTTAL FROM THE REVENUE IN THIS REGARD. IN VIEW OF THE LONG LINE OF JUDICIAL PRECEDENTS ON THE ISSUE, WE FIND MERIT IN THE CONTENTION OF THE ASSESSEE THAT PROPORTIONATE DISALLOWANCE OF EXPENDI TURE UNDER RULE 8D(2)(II) IS NOT JUSTIFIED WHERE INTEREST FREE OWN CAPITAL TOGETHER WITH RESERVES EXCEEDS THE CORRESPONDING INVESTMENT. 11. WITH REFERENCE TO ANOTHER LIMB OF DISALLOWANCE MADE BY AO UNDER RULE 8D(2)(III) AGITATED BY THE ASSESSEE, WE NOTICE THE AVERMENTS MADE ON BEHALF OF THE ASSESSEE THAT TAX-FREE INCOME EARN ED IN THE FORM OF DIVIDEND HAS ARISEN ENTIRELY OUT OF MUTUAL FUNDS WH ICH ARE ONE TIME INVESTMENTS WITHOUT ANY PROACTIVE INVOLVEMENT OF MA NAGEMENT PER SE . THE SURPLUS FUND OF THE COMPANY HAS BEEN SIMPLY PAR KED IN THE MUTUAL FUNDS. WE TAKE COGNIZANCE OF THE ARGUMENT ON BEHAL F OF THE ASSESSEE THAT MUTUAL FUND INVESTMENTS BEAR DIFFERENT TRAITS AND A RE DIFFERENT SPECIES OF INVESTMENT. FOLLOWING THE DECISION OF THE COORDINA TE BENCH IN THE CASE ITA NO.350/AHD/ 2016 M/S. CERA SANITARYWARE LTD. VS. ADDL.CIT ASST.YEAR 2011-12 - 7 - OF M/S.ACADEMY FOR COMPUTER TRAINING (GUJ) PVT.LTD. VS. DY.CIT IN ITA NO.3065/AHD/2013 DATED 30/11/2016, WE FIND MERI T IN THE CASE MADE OUT BY ASSESSEE FOR NON-APPLICABILITY OF DISAL LOWANCE MADE UNDER RULE 8D(2)(III) OF THE I.T.RULES IN RESPECT OF TAX- FREE INCOME FROM INVESTMENT IN MUTUAL FUNDS. 12. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOW ED. THIS ORDER PRONOUNCED IN OPEN COURT ON 15/ 02/2018 SD/- SD/- () ( ) (RAJPAL YADAV) ( PRADIP KUMAR KEDIA ) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD; DATED 15/ 02 /2018 3..),.)../ T.C. NAIR, SR. PS !'#$%$' / COPY OF THE ORDER FORWARDED TO : 1. #% / THE APPELLANT 2. &#% / THE RESPONDENT. 3. 456+ 7+ / CONCERNED CIT 4. 7+ ( ) / THE CIT(A)-6, AHMEDABAD 5. 89:+)56 , 56/ , 4 / DR, ITAT, AHMEDABAD 6. :<* / GUARD FILE. / BY ORDER, &8++ //TRUE COPY// / ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD